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In this qs part b ii) Angelino sold a bldg with a carrying amount of 7.5m with an estimated life of 20 yrs,it sold the bldg to F for 12 m and entered into an agreement to rent it back for annual rental of 1.3 m for a period of 5 yrs.the bldg had a market value of only 10m
To rent an equivalent bldg under similar terms would only cost 0.8m per annum,finance costs are 10% per annum,what amount shall come in the FS of Angelino?Well, it seems that you have the question available to you so presumably you also have the answer available.
What does that suggest?
I cant understand frm the answer.do we take the capital repayment as the difference between what the market would have charged and what actually we are paying or do we take the full 1.3m as capital repayment every yr?
I don’t see from the information you have given that there is any capital repayment. This looks like a sale and an operating lease back. maybe the question is asking you to sub-divide the 1.3 into operating lease rental payment and the repayment of the surplus proceeds which are to be treated as a loan? Would that answer your question?
That is exactly what i thought but in the kit anwer they have taken it as a 500 capital repayment every yr.pls help
Well, if we are told that the market rent for that type of building is only 800,000 and the agreed repayment is 1.3m, then the excess of 500,000 must be in relation to the “effective loan”
However, why they have treated the entire 500,000 as a capital repayment of the “loan” I cannot answer. I would have thought that some of that 500,000 should be interest on the effective loan and only the balance treated as a capital repayment.
????
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